Monday, April 23, 2007

Fallout from BofA's Big LaSalle Bank Buy

Finally, Bank of America can start living up to its name.
Despite a long held desire to be a national financial franchise, BofA never had much of a presence in the Midwest--a few ATMs and small banking centers. That's all going to change, provided its deal today to acquire Chicago-based LaSalle National Bank becomes reality.
BofA is plunking down $16 billion cash to acquire the LaSalle operation, which is being spun off by its Dutch-owned parent company ABN AMRO (which itself is in the process of being bought.)
Here's some first and fast impressions:
--This is the deal. Don't look for a white knight to swoop in and make a competing offer. At the current price of $21 billion in cash ($5 billion goes back to BofA's reserves, so the purchase price is $16 billion.)it's unlikely. In its conference call to investors, BofA executives said the purchase was 21.3 times 2007 earnings, compared to similar deals where that ratio was 16.3 times earnings. BofA argues that LaSalle's growth potential in Chicago, and Detroit, merits this higher bid. That said, Wall Street is expected to be cool to this deal because it takes money away from stock buyback programs for a few years, while the bond rating agencies may be concerned that the cash offer will dilute the banking giant's capital for awhile. These are risks that BofA, which has made many deals, is willing to take. Other suitors are less likely to up the ante.
--Layoffs on the way. On the conference call today with investors, BofA brass made plain that it intends to incorporate many back office, technical, administrative and corporate functions into its existing infrastructure. That means cutting hundreds of jobs through buyouts or outright firings. As noted, BofA is paying a premium for LaSalle and intends to recoup some of that money quickly through cost-savings. The company is assuming an $800 million after-tax restructuring charge, most of which will likely go toward severance and golden handshake packages. That said, don't look for BofA to reduce the number of loan officers, tellers and customer services folks--the bank is more likely to increase those ranks as it sets out to grow the LaSalle business.
--Retail banking is Job One. Above all else, that's what this deal is all about. BofA is first and foremost a consumer banking power. That means selling more online banking services, credit cards, loans, money markets, mortgages, etc. It will focus on expanding its number of retail bank outlets, ATMs, and other banking centers. BofA CEO Kenneth Lewis said LaSalle's retail business is now "seriously under-penetrated" (sounds painful, eh?) in the city and that boosting the consumer banking business in Chicago is the top priority.
Plugging the Chicago and Detroit franchises into BofA's national framework is the first major task. From there, the emphasis will be on advertising, marketing, promotion and other "get out the vote" functions aimed at getting current LaSalle customers to buy more BofA stuff and attracting new customers from rivals like JPMorgan Chase, Harris Bank and smaller banks. Look for millions of dollars in consumer bank promotions (good for newspapers and other consumer media outlets.)
--LaSalle name? A dead duck. And don't expect the outcry we heard when Macy's threw Marshall Field & Co. on the junk pile. LaSalle is, after all, a bank. No one loves their banker that much. Still, it's another example of how longtime Chicago product names are giving way to national brands.
--Small business, middle-market customers pay up. LaSalle has a great portfolio of local business clients and BofA management says it would love to retain the lion's share of these customers. That's provided, however, that loyal customers are also going to buy BofA's other banking products, too. A client that just wants cash management or the occasional loan, is likely to feel unwelcome at BofA. This opens up the possibility that the area's small and mid-sized banks will be able to win over some LaSalle defectors.
--Neighborhood backlash. BofA and local activists don't always get along. Ald. Dorothy Tillman, who's leaving the City Council, has criticized BofA. In early 2005, she led a campaign against a $500 million refinancing deal because of its alleged links with slavery. These links are allegedly through FleetBoston Financial, a company which BofA acquired in 2004. Providene, a predecessor of Fleet Boston, was supposedly founded by a slave owner in 1791. Tillman may be exiting the council but this issue is not going to go away.
--Community support, sort of. Yes, BofA says it will continue to support the LaSalle marathon. Makes sense from a retail marketing standpoint. More problematic will be continued support of the arts and culture. LaSalle has been a huge benefactor of the symphony, theatre and other cultural venues and events. My impression is that BofA will not be as connected with those opportunities and that fund-raisers will have to scramble for new backers. BofA is going to go for the big populist messages and events, not target the carriage trade .
--Don't laugh at Detroit. Yeah, Detroit is a disaster but there's money to be made. We still buy cars, you know. With this acquisition, BofA gets a large retail banking presence in the areas that surround Detroit, too. There's lots of wealthy types and loose cash in Detroit's suburbs.
Finally, more bank acquisitions on the way? Actually, there's not a lot of large Chicago-area banking groups left to be bought. With LaSalle gone, all eyes now turn to Bank of Montreal's Harris Bank franchise. It's just a matter of time before Harris joins the long list of well-known local financial service company logos that have faded away.
It's a line-up that includes First Chicago, Talman, Cragin, Bell Savings and, coming soon, LaSalle National Bank.

1 comment:

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